BBRY Plunges 28%: Two Downgrades; Looking Like Palm, Says Macquarie

By Tiernan Ray

Shares of BlackBerry (BBRY) closed down $4.02, or almost 28%, at $10.46, deepening its losses at the close of the session, after the company this morning missed consensus estimates for the fiscal Q1 ended last month, despite what had come to be seen as a likely beat by even the bears. The company forecast a net operating loss this quarter versus consensus for 11 cents, but declined to provide a forecast beyond that.

The stock got two downgrades today, that I can see, from Macquarie Equities Research and Wells Fargo.

Sales of smartphones totaled 6.8 million came in below estimates of 7 million or higher (Thomson Reuters had 7.6 million as consensus), and, more dispiritingly, sales of the newer BB10-based smartphones, the Q10 and Z10, came in at 40% of the total, or 2.7 million, below estimates for 3 million or more.

Subscribers to the company’s secure messaging service declined by 4%, to 72 million from 76 million last quarter.

CEO Thorsten Heins remarked that “We are still in the early stages of this launch, but already, the BlackBerry 10 platform and BlackBerry Enterprise Service 10 are proving themselves to customers to be very secure, flexible and dynamic mobile computing solutions.”

Over the next three quarters, we will be increasing our investments to support the roll out of new products and services, and to demonstrate that BlackBerry has established itself as a leading and vibrant player in next generation mobile computing solutions for both consumer and enterprise customers.

On the conference call following the report, the company said it would no longer provide subscriber numbers going forward:

With our transition to BlackBerry 10, our historical subscriber reference does not share the same service revenue dynamic as previous BlackBerry devices. Starting with Q2, we will not be providing this non-financial metric. As new service revenue is generated, we will look to provide additional information associated with these services and any other relevant details around service revenue trends.

The company said sell-through of all handsets was 6.8 million, the same as shipments, but management declined to provide sell-through for BB10 handsets when asked.

Jefferies & Co.’s Peter Misek, who has a Buy rating on the shares, and a $22 price target, and RBC Capital‘s Mark Sue, who has a Sector Perform rating and an $18 price target, were both on CNBC this morning debating the outlook.

Misek, who had written on June 20th the company could blow away estimates, perhaps reporting $4.1 billion and 50 cents profit, remarked that “Our thesis was always on the mobile device management [MDM] market, the high end of the smartphone market is fully saturated.”

“They’v got to get the MDM market.”

Sue, who had been modeling $3.5 billion and a 9-cent profit, on sales of 3 million BB10 units, remarked that “Our view is the [smartphone] market is still growing, still healthy from a unit perspective; the numbers should have been better given they are selling to 300 carriers around the world.” With tangible book value declining, Sue believes the shares have a trading range of $8.50 to $15.

The shares have received one downgrade so far this morning, from Macquarie’s Kevin Smithen, who cut his rating to Underperform from Neutral, and cut his price target to $9 based on his sum-of-the-parts analysis.

Smithen writes that BlackBerry’s comeback is “looking more like Palm,” the one-time mobile device king that staged a comeback in 2009 only to get bought out by Hewlett-Packard (HPQ) in 2011 and then shuttered.

The results came in below the $4.14 billion and 9 cents profit Smithen had projected. He had been modeling 8 million smarpthones in total.

“At this point, the positive optionality on the BB10 launch has subsided,” writes Smithen. He cut his EPS view this fiscal year to a loss of 23 cents from a profit of 38 cents, and cut his 2015 view to a loss of 35 cents from a prior 8-cent profit estimate.

“We are sceptical on BES opportunity, therefore we think the likely end game for BBRY is a break-up or liquidation at a lower price.”

Smithen’s back-of-the-envelope on BlackBerry stock is based on total revenue of $11.26 billion, or $6.12 per share at a 0.3 times multiple. The balance sheet items, $2 billion in cash at year’s end, $750 million in patent value on its share of the Nortel portfolio, and $825 million for the rest of its patent portfolio, add up to $6.89 per share.

However, Smithen doesn’t count the patents as part of a buyout value. His reasoning, as explained to me in an email reply to my inquiry was as follows: “We don’t include the value of the patents in our equity value calculation because they are needed to run the services business. It’s likely impossible to separate the ip from the services business cash flow stream.”

And Wells Fargo’s Maynard Um cut his rating to Market Perform from Outperform, and cut his “valaution range” from a prior $19 – $20 to $10.50 to $12.

It’s hard to short the stock, given borrowing is tough with the existing high short interest, and he’s not counting out an eventual turnaround in the handset division. But that turnaround is now further out in time, in his view, and not worth buying into at the moment:

Our downgrade does not necessarily reflect a view that BBRY will not be able to succeed (while we still believe it can upgrade its existing installed base, admittedly visibility is limited), but, rather, that success may be further out than we would like and that the benefits may be costly upfront as the company invests heavily. However, at 0.2x EV/sales, we believe investors are already handicapping limited/no success and believe valuations at these levels are risky to be short as these levels have, based on our past experience with other tech companies, typically prompted some action. However, we do not believe valuation alone is a strong enough rationale to be long BBRY at this point in time. We expect BBRY shares to experience significant volatility quarter to quarter with downside risk around continued slow sell-in/uptake of BlackBerry devices and further degradation of services revenue and upside risk around the reversal of service revenue in Venezuela (not embedded into forecasts) as well as lower operating expense. We are most disappointed by the slower-than-expected ramp relative to our expectation and relative to high marketing spend and note that while management highlights it has only been 5 months into the BB10 product cycle, we note that the industry has been seeing a short 12-month product cycle between smartphones over the past several years.

Um cut his estimate for this year to a net loss of 46 cents from a prior estimate for a 32-cent profit, while maintaining a $12.97 billion revenue estimate.

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There are 29 comments

JUNE 28, 2013 12:23 P.M.

Mike wrote:

The Company said it would break even. The cash balance went up and they did not borrow it, so they made "money". If all these analysts are so right about everything, Blackberry was suppose to run out of cash almost 2 years ago, but it keeps going up like clockwork. Contrast that with Worldcom which reported GAAP profits but its debt increased every quarter until it could borrow no more and when under. And these same analysts did not see the Worldcom collapse coming even though it was staring them in the face, if they simply analysed cash instead of GAAP BS.

JUNE 28, 2013 12:26 P.M.

BBRYCANADIAN wrote:

was wary of all the BBRY bulls posting. Wish it were true, being a Canadian eh.

Too good to be true because
- no one I know has a new BB10 Z10 (and I work in IT). Colleagues, friends, watching people in public.
- our company, a global IT software vendor, hasn't upgrade to BB10 (on the servers) and no plans, so I can't even replace my Bold with a new Z10 (wanted one)
- drop by the local mobile shops. and no buzz/ads for Z10, just the phone among many. They had store sections for iPhone/iPad,and Android (Samsung, HTC, LG, Sony) but where in the past there was a Blackberry corner, now there isn't.
- BBRY should have had better results, given the installed base of BBRY users on old phones. Obviously it didn't materialized, you don't think the CEO would have called out the fantastic conversion/update of their installed base customers to Z10/Q10 if he could? of course he would, so concern that the old BB users are not switching over.

Last one out, lights out.

JUNE 28, 2013 1:01 P.M.

Anonymous wrote:

Re global smartphone saturation and the feelings I mean thesis of Peter Misek. It's not saturated. Nor is saturation the concept to use re the situation RIM and its BB10 must battle against. Nevertheless. To say saturated is a rather definitive reality that can be thought of as analogous to ain't going to happen BB10 fans. Sorry freddysrevng. The bull of bulls Peter Misek says it looks ugly for Waterloo's new hope. As for MDM. Dream on. They snagged BDO the bean counting firm in Canada and Whirlpool. Yay. Yippee. BFD.

They have cash. What good is that. They may not exactly be Palm but they are dying a death of a thousand embarrassing cuts. And in the end. They will get whatever they get because the Nortel Motorola mentality has proven too costly and quite unnecessary. BBRY is buzzard food. Suitors will be fighting to avoid buying it. It's not necessary to the realm. Really.

JUNE 28, 2013 1:35 P.M.

Rob wrote:

Mike - there's no more spin to be done my friend. Longs were wrong. This report is horrible in every respect. $3B in cash disappears pretty quickly when you have no other means to keep the lights on every day. Subs down 4%, BB10 unit sales (who knows really because BBRY will never give a solid answer) 2.7m. My guess is that's inflated with rounding and is probably truly closer to 2.5m.

This on top of a refusal to offer forward projections, actual unit sales, and Heinz's statement that "we are early in the launch"!!!??? EARLY!!!!???? 5 months is half way through a product life cycle and certainly more than enough time to see what normalized run rate looks like. It is the very opposite of early my friend. It is over.

JUNE 28, 2013 2:05 P.M.

freddysrevng wrote:

How come I haven't posted yet?

Cat must have my tongue I guess.

BBuried in debt because I bought @ $120+ per share three years ago.

JUNE 28, 2013 2:11 P.M.

Anonymous wrote:

One thing is for sure. This really really sucks and that will only beget more sucking as an outcome. That's one of those laws universally understood even if you want to toss in areas of the universe where the laws of physics might not apply and as such you start considering theoretical laws of physics and sucking.

By the way. Who is it on RIM's board that's the big expert on sucking? Is it Roger?

JUNE 28, 2013 2:11 P.M.

Not enough lipstick manufactured wrote:

to pretty-up this fat pig.

Nice call RimmJobbers!!

BTW, where are all of the rimmjobbers posts?

Normally there are, like twenty thousand posts on any story rimm/bbry related. Wonder why that's not the case now? Hmmmmmmmmmmmmmmmmmm....tha'ts a he's scratcher!

BWA-AAAHAAAAAAAAAAAAA-HAAAÅAAAAAA!

JUNE 28, 2013 2:40 P.M.

KranthiK bandaru wrote:

Peter Misek hehehehehe!!! Stop bashing AAAPPPLLLEE. Your long thesis got killed now lets see how long your short thesis will hold.

K

JUNE 28, 2013 2:44 P.M.

On behalf of freddysrevng and Kurt Windibank wrote:

Hey don't forget. We can look forward to the Q5, Z5 and the Aristo of Monte Christo to avenge Waterloo. That'll do it eh?!

Maybe it's time they sought a good ol exit strategy. Just in case. Batter only gets so many swings and innings. Hmm. Or are they going to vainly drive it into the ground? That's usually what your basic greedy sociopath does who never considers their pathological optimism.

JUNE 28, 2013 3:12 P.M.

Anonymous wrote:

Thorsten Hiens said it's a marathon. It is it is but they just got run over by a garbage truck!

JUNE 28, 2013 3:13 P.M.

Anonymous wrote:

What's a short squeeze?

JUNE 28, 2013 4:36 P.M.

Redmond wrote:

At what point does Jefferies sack Peter Misek? He's basically a weathervane with terrible research. His channel checks are completely unreliable. His information on new products is almost always wrong. He looks like someone scrambling to keep his job.

JUNE 28, 2013 10:17 P.M.

Peter Misek is not telling the truth again re MDM... wrote:

Doing a Google Trends search for terms MDM, Mobile Device Management. What do you get? You get a global map that's identical to RIM's healthiest markets. That means where RIM must improve BB10 sales RIM must also improve MDM sales: I think we are unlikely to ever see one without the other. Hmm. Yep. Outside of Britain, Kanada, South Africa, Indonesia, Pakistan, Venezuela... no one is going to go BB10 w/o MDM or MDM w/o BB10. Eh. The typical response will be Hi don't call us we'll call you, or Hi not yet, or Hi thank you we'll think about it, of Hi can you get the eff off our property and stop calling us we're not interested, or Hi seriously you're still in business.... Or Hi hahaha haha that's funny: No!

Time to look up PALM's charts to see just what kind of volitility we can expect. Boom shocka locka. Boom shocka locka. Boom shocka locka... And the beat goes on.

JUNE 28, 2013 11:55 P.M.

I thought... wrote:

In 2010 RIM said "Amateur Hour is Over". Thank goodness for Peter Misek. The good times never end.

Five hours ago the G&M reported that RIM will now concentrate on software. Analysts have weighed in: What good is that when they're making everything free. And maybe you haven't noticed. The DoD approved the security of other non BB devices.

JUNE 29, 2013 12:08 A.M.

Get out your pencils boys and girls! And put on your thinking caps! wrote:

Today kids we're going to create a chart. Yep. A chart! Can you say that? C-H-A-R-T. That's See Aitch Ay Are Tee. CHART! We are going to chart the popularity and sales of Blackberry's BB10 mobile devices against the popularity of Canada's Prime Minister Stephen Harper. Okay. Get your ruler and put it in the top left corner of your chart and place the other end of the ruler in the lower right corner. Now draw a line from the top left corner to the lower right corner that's a straight line down. Wow! Doesn't that feel satisfying?!

Now let's create a new chart for Canada's economy. Without approval of the Keystone pipeline what do you think the chart will look like? Gather your numbers kids.

JUNE 29, 2013 12:41 A.M.

Kickstarter Campaign... wrote:

Seeking funding to purchase a two-three storey building in a major urban centre for a new Canadian Museum of Famous Canadians Who Were as Bald as a Biliard Ball (no parasites) Artists may apply for commissions. Please submit sketches and maquettes. Open to offers and suggestions. Please: No more Jim Balsillie or George Smitherman giant colossus statue offers.

JUNE 29, 2013 12:56 A.M.

@ Kickstarter wrote:

Can I be in the museum? I am really bald. Bit of peach fuzz though. But my best feature is my nose. It's really big. Holy smokes! Nothing like it. Sometimes I wear a single cup nose bra that's just a holster so it won't sag. It's my invention. If I could insure my nose I wouldn't need it. That's because I use my nose daily at work. I can smell money like nobody's business. My dream is to see a forty foot public sculpture of my olfactory organ...

JUNE 29, 2013 1:11 A.M.

Anonymous wrote:

Nobody mentioned yesterday that in one single day BBRY lost almost $2.5 billion meggabuckadingdongs in market cap!

JUNE 29, 2013 1:54 A.M.

Anonymous wrote:

Does the analyst Simona Jankowska at GS still think Blackberry has a 30% chance of success?

JUNE 29, 2013 1:13 P.M.

bud wrote:

Perhaps HP will buy them? HP is very good at making acquisitions!

JUNE 29, 2013 3:31 P.M.

TrollStomper wrote:

Hahaha you can tell that like 90% of these posts are the same person. Keeps saying stuff like "boomshakalaka"

Get a life!

JUNE 29, 2013 8:45 P.M.

@ TrollStomper wrote:

Do Wop Ah Loo Wah! Do Wop Ah Loo Wah! Thorsten Heins goin to bend over for you ah! Shorts for you. Shorts for me! Do Wop Ah Loo Wah!

Note to the Canadians. Upon doing a Barron's BBRY search for articles. You guys were pretty heavy on the blogger and any Bearish analyst. Threatening too. By the way. Now that BBRY has hired the lawyer Steve Zipperstein. Where's are the lawsuits as Heins threatened? Hmm. What about the complaint to the SEC?! Give us a break. Your moral indignation is so hollow and phoney. Like you.

You know. It's really true. People are not buying BB10 devices and lots of them are being returned. Why would a person want a BB10 device? It's too little too late mate.

Enjoy Canada Day because Faucette will be enjoying popping the cork on the champagne bottle:-P

JULY 1, 2013 5:07 A.M.

Happy Canada Day!:-P wrote:

BBRY is down another -2.29% in the Pre-Market! That's over 30% in 2 days! And it ain't over yet.

Q.: Will it go to $10, $9, $8?

Guesses?

Me thinks sacrifices will be made and revenue will be cut in favor of profits. And BBRY will retreat from least profitable markets.

Looks bad. Real had. Too much for the Canadian mind to handle. What will they do?

JULY 1, 2013 5:29 A.M.

Anonymous wrote:

Down -$0.29, -2.77% in Pre Market = $10.17

JULY 1, 2013 5:44 A.M.

Re AAPL: Fa la la Fa la la! Good times are here again?! wrote:

Forbes and the WSJ are reporting today that Apple is Trademarking iWatch in Japan :-)

Is AAPL a buy?

PS. What was Jeffries' Peter Misek saying about the iWatch? Apparently suppliers were reporting that Apple was taking delivery of 1.5" OLED screens.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.